Workday Surges 13%: Bulls Charmed by Growth, Financials Progress

By Tiernan Ray

Shares of cloud computing software vendor Workday (WDAY) are up $9.30, or almost 13%, at $82.60, after the company last night reportedfiscal Q3 revenue and profit that topped analysts’ estimates, and a Q4 revenue projection that beat as well.

The company competes with SAP AG (SAP), Oracle (ORCL), and other traditional vendors of enterprise software.

Analysts today are not only charmed by the 76% jump in revenue, but also the company’s progress in selling “financial management” software.

Workday’s main business has been applications for human resources professionals. There has been some skepticism about whether the company would have success beyond that niche with other functions of the corporate backoffice, and so progress in financials was an encouraging sign for the bulls.

The stock has gotten one upgrade today, that I can see, from R.W. Baird‘s Steven Ashley, who raised his rating on the shares to Outperform from Neutral, and raised his price target $5 to $90, writing that he was particularly pleased with the financials product:

Accelerated adoption of Financial Management (FM) is especially encouraging given the larger average deal size (typically ~150% size of core HCM) and meaningful incremental market opportunity. 10 new customers was strongest growth ever. Nine of the purchases were of Suites (HCM + FM). FM is currently being sold to Large Education customers and medium-sized business, and in the future will be able to handle larger deployments. Live deployments total 25 versus 15 a year ago. Management hopes to at least double the number of deployments over the next 12 months.

Ashley raised his estimate for this fiscal year to $465 million in revenue and a net loss of 56 cents, and negative free cash flow of 39 cents, up from a prior $446 million, negative 63 cents per share, and negative 49 cents.

Pacific Crest‘s Brendan Barnicle reiterates an Outperform rating, and s price target of $90, and is also encouraged by the financials progress:

Workday added a record 10 financials customers during Q3, as well as 50 new customers, including eight Global 2000 customers. Generally, when buying financials, customers are buying the company’s other products as well. During Q3, only one customer bought only the financials solution. The continue momentum of the financials product is very encouraging, because it is the biggest source of future continued growth for the company.

Barnicle raised his estimate for this year to $463 million in revenue and a net loss of 56 cents per share from a prior $442 million and 67-cent loss. His free-cash-flow loss goes to 39 cents from 60 cents previously.

Barnicle thinks there’s upside, and he throws up the following table of the company’s short history of having beat its own forecasts:

Oppenheimer & Co.‘s Brian Schwartz reiterates an Outperform rating, and a $92 price target, writing “With Big Data now generally available, Recruiting and Student on the way, and Financials beginning to gain traction upmarket, we believe that these new product cycles could drive significant bookings upside in the next 12-18 months.”

“Led by a visionary management team, we remain bullish on WDAY as future product cycles should drive increased platform adoption, and secular SaaS trends point favorably in their direction, as the company continues its journey to being the next tier-1 software supplier.”

The only item Schwartz notes as a negative is a slowdown in billings growth going forward, about which he seems little concerned: “Although management expects billings to decelerate sequentially and y/y in 4Q and 1Q14, both quarters should still grow 40%+ y/y growth.”

Schwartz’s new estimates for this year are $462.6 million in revenue and a 59-cent loss per share, up from $440 million and negative 68 cents.

Not everyone is entirely satisfied, though the criticism from bears is notably muted today.

Northland Capital Markets‘s Scott Berg reiterates a Market Perform rating, and a $70 price target, writing that “3Q was a solid across the board beat, but we remain on the sidelines concerned with changing fundamentals causing possible near-term headwinds relative to a sky-high valuation.”

Despite that caution, Berg doesn’t elaborate on the possible headwinds; his note is entirely focused on recounting several positives in the quarter, including “Operating margins of (15.6%),” which “were the best in the company’s history and driven by both gross profit outperformance,” and “days of sales outstanding (DSO)” that “remain low at 62 days.”

Berg raised his estimate for this year to $463 million in revenue and a net loss of 57 cents a share, versus a prior $441.9 million and 62 cents.

Janney Capital Markets‘s Yun Kim is another skeptic, reiterating a Neutral rating on the shares. Kim notes what he estimates was 95% growth in “adjusted calculated billings” in the quarter, better than the 60% to 80% growth in past quarters, and remarks favorably on several trends:

Overall, we believe its strong billings quarter reflects continued strength in its core replacement cycle-driven HCM (human capital management) business, which we believe will continue for at least several more years. Also, we think the company is gaining incremental traction with its financials product, which was reflected in the strength in professional services, and also with its mid-market selling efforts, which also typically involve more in-house professional services work.

But he also thinks that with a 17 times revenue multiple, the stock is pricing in a lot of success already, and further success in the financials product area is not certain:

Shares trade at 17X our CY14 revenue estimate with CY14 revenue growth at 51%, which represents the second fastest growth in the SaaS industry. We note that Our DCF-derived $82 FV implies that the company can grow its revenue by 35% CAGR over the next five years, reaching 12-13% market share in the HCM market from 2% share today and expand its non-GAAP operating margin to 10%. We believe shares fairly reflect this current positive scenario, but upside could be limited without the company gaining incremental traction in its new product offerings, especially its financials product. While initial signs indicate that the company is gaining solid momentum in this new market, we believe the company faces higher level of execution risks in penetrating the market for its financials product, given its lack of history in this market and higher cost barrier related to replacing a legacy deployment. Hence, we think more concrete signs of adoption of its financials product within the large enterprise market and, to lesser degree, traction of its vertical apps (government and education) are needed for shares to justify higher valuation multiples.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.